Reverse mortgage change is on ballot

Updated 8:59 pm, Friday, October 18, 2013

Reverse mortgages are much more complicated than a traditional mortage, and they require a huge amount of paperwork.

Reverse mortgages are much more complicated than a traditional mortage, and they require a huge amount of paperwork.

Photo: NICOLE FRUGE, SAN ANTONIO EXPRESS-NEWS

Reverse mortgage change is on ballot

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Reverse mortgages have become a popular financing tool for Texas seniors, and a proposed constitutional amendment could give homeowners more flexibility on how those funds are used.

Texas is the only state in the nation that doesn't allow seniors to use reverse mortgages for the purchase of a home. But Proposition 5, a proposed amendment to the Texas Constitution, would give seniors the option to use a reverse mortgage to buy another home.

Under this kind of lending, people 62 and older can access equity in their home with minimal credit or income qualifications. As long as the borrower lives in the house, money is paid to the homeowner. After a homeowner's death, the loan must be repaid either by selling the home or through the borrower's estate.

With a reverse mortgage for purchase, seniors can tap into their home equity and use a portion for a down payment on another primary residence. Borrowers pay just one fee instead of separate closing costs on the new home and the reverse mortgage.

The amount a person is able to get depends on the borrower's age, interest rate and home value. The U.S. Department of Housing and Urban Development oversees this type of lending tool, and most reverse mortgages are backed by the Federal Housing Administration.

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For Texas, the first reverse mortgages were issued in 2000. Since then, Texas homeowners have accessed about 54,000 reverse mortgages, totaling about $4 billion, said Scott Norman, president of Texans for Proposition 5. Currently Texas has the second-largest market for reverse mortgages, with about 8.6 percent of the national market share.

If the measure passes — early voting starts Monday and Election Day is Nov. 5 — Norman estimates that the number of reverse mortgages issued to Texans could grow 15 percent to 20 percent in the next five years.

“This opens a great discussion about home equity in the context of retirement planning,” Norman said. “We know the average Texan has a majority of their net worth tied up in their home equity. We also know the average Texan in or near retirement has little or no savings.

“And so knowing what we know, we really need to start having a detailed conversation about the retirement crisis.”

Aside from providing a new lending tool, the resolution provides a stricter safeguard that requires written disclosures be given to borrowers at least 12 days before the loan closes.

“What it's doing is more cleaning up of what we currently have and providing additional financial counseling and disclosures to seniors, to ensure that they understand what they're doing, what the costs are and what's involved,” said Steven Gragg, chairman of the San Antonio Board of Realtors, which backs the measure.

Proposition 5 is one of nine constitutional amendments on the ballot.

The editorial boards of multiple Texas newspapers, including the San Antonio Express-News, have issued support for the measure.

The proposition — authored by Rep. Mike Villarreal, D-San Antonio, and Sen. John Corona, R-Dallas — passed the most recent legislative session with no formal opposition.

Even though proponents say the lending tool can provide financial freedom to seniors, the default rate for reverse mortgages is about 10 percent, roughly twice as much as traditional mortgage loan, said Pamela Villarreal, a senior fellow at the National Center for Policy Analysis. In 2011, the average value of a reverse mortgage was about $158,000, according to a reverse-mortgage report Villarreal released in May.

Villarreal doesn't oppose reverse mortgages, but she said consumers need to understand what they're getting into. For example, payments toward buying a new home are not made, but interest and fees on the reverse mortgage for purchase still must be paid.

A major downside she notes is that if homeowners fail to pay property taxes or homeowner's insurance or don't maintain the house, a lender can stop payments and foreclose on the home.

Also, she's not convinced that the federal government should back the loans, since the FHA's 2012 financial statements reveal about $140 billion in outstanding FHA-insured reverse mortgage loans, her report shows.

“I think it's good that people can use the property they own — that they have the option of doing this with the property they have,” she said of Proposition 5. “But there are always cautions with these types of things.”